Malloy, Hospitals To Fight Over Tax In Latest Clash

Gov. Dannel Malloy's budget would give municipalities the option to tax hospital-owned real estate, though property such as MRI machines and computers would continue to be tax-exempt.

Gov. Dannel P. Malloy's plan to let municipalities tax nonprofit hospitals for the first time would generate much-needed income for cash-strapped cities. The hospitals, in turn, would more than recoup the tax dollars they lay out through new Medicaid reimbursements.

What's not to like?

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Plenty, say hospital officials. They are girding for battle at the Capitol, the latest skirmish in the war between the Malloy administration and hospitals.

"We're essentially beside ourselves that there's another gimmick being proposed that puts us in the middle of solving another budget crisis," said Stephen Frayne, senior vice president for health policy for the Connecticut Hospital Association, which advocates on behalf of the state's 27 acute-care hospitals and other health-related groups.

The hospital association is vigorously fighting back in letters and emails to lawmakers, and in testimony to the legislature's appropriations committee. It has also taken its case directly to the public, launching a television ad campaign this month that predicts longer wait times and scaled-back services if the Democratic governor's plan is approved by the General Assembly. The leaders of some of the state's small hospitals say they may be forced to close if the proposal isn't scuttled.

Malloy's budget would give municipalities the option to tax hospital-owned real estate, though property such as MRI machines and computers would continue to be tax-exempt. At the same time, the state would increase its supplemental Medicaid payments, steering more money to the hospitals to help cushion the blow of the new tax. Medicaid, paid for by states and the federal government, provides health insurance for low-income and other needy people.

The administration estimates hospitals will pay a combined total of about $212 million in property taxes while getting back roughly $250 million in additional payments, for a net gain of close to $38 million.

But that calculation does not take into account the deep well of mistrust between the hospital industry and the administration. Patrick Charmel, CEO of Griffin Hospital in Derby, said the state made similar assurances in 2011, when it instituted a provider tax on hospitals in exchange for supplemental Medicaid payments. Over the years, the tax has increased while the payments have decreased.

"We've seen this movie before," Charmel told the appropriations committee this month. "It didn't end well."

Ben Barnes, Malloy's budget chief, acknowledged lingering bad feelings between the administration and the industry. "There is well-earned mutual mistrust between the Malloy administration and the hospital industry," Barnes said recently, adding that the administration is committed to making sure hospitals receive the supplemental Medicaid payments.

At a hearing this month, lawmakers pressed Barnes about the deal, especially in light of huge changes in health care brought on by the likely repeal of the Affordable Care Act.

"Can [hospitals] be assured that, in the new climate in Washington, those funds [will] actually be there to compensate for such a massive increase in costs that they have to bear?'' Sen. Toni Boucher, R-Wilton.

Barnes struck a conciliatory tone. "I'm certainly sensitive to that and I said to the hospital industry in private and in public that we are willing to entertain whatever protections in state statute we can put in place to protect their supplemental payments in the future," he said. "However, I don't think any of us, certainly not me, [are in a] position to make any assurances about the direction of federal Medicaid policy and I am also very apprehensive about that future, so I understand their concern in that regard and that's something we will have to work around given the uncertainty in which we're all operating."

Although hospital officials say their nonprofit institutions are struggling to serve their communities at a time of enormous change in the health care landscape, Malloy and his advisers have portrayed the industry as a big business run by richly paid executives.

"For one of the few sectors that does well in the budget to cry foul and distort the facts is unfortunate, especially when the proposal would also inject more dollars into local municipalities," said Chris McClure, a spokesman for the state Office of Policy and Management. "For an industry that repeatedly claims to be in dire financial circumstances, it's remarkable that they can find millions of dollars every year for paid advertising."

Barnes angered hospital leaders two years ago when he was asked why Malloy was seeking to raise taxes on hospitals. "Why do you rob banks? That's where the money is," he responded.

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The administration also has frequently pointed to the six- and seven-figure salaries and plush benefit packages offered to hospital brass as justification for their budgeting decisions. According to filings with the state Office of Health Care Access, the top-earning executive in 2015 was Yale-New Haven Hospital CEO Marna Borgstrom, who earned $2.75 million in salary and $860,669 in fringe benefits.

But Charmel, whose 2015 compensation package topped $550,000, paints a starkly different picture. "The concern here is hospitals serve a charitable mission, they provide a tremendous community benefit and therefore they enjoy a property tax exemption," he told lawmakers at a hearing on the governor's proposal this month. "Once that property tax exemption is taken away, it will never come back."

Connecticut isn't the only cash-strapped state seeking to tax nonprofit hospitals. The Illinois Supreme Court recently heard arguments in a lawsuit challenging a provision that allows that state's not-for-profit hospitals to skip paying property taxes. In New Jersey, dozens of hospitals are challenging a tax court judge's 2015 ruling that a hospital shouldn't be exempt from property taxes because it operates more like a for-profit business.

Frayne, of the Connecticut Hospital Association, said the complex funding arrangement proposed by Malloy poses another problem: "These are dollars that are supposed to be used to take care of people but instead they're being diverted to everything but taking care of people,'' he said. "Are we really comfortable ... using money that is intended to serve patients ... [for] solving budget problems?"

Lawmakers have just begun examining the budget presented by the governor earlier this month and the fate of the hospital property tax is unclear. Many legislators have a hospital in their district, and they are often a top employer and a major driver of the community's economy.

"I'm just nervous about all this stuff," said Rep. Patricia Dillon, D-New Haven. "I have no idea what they're going to do in Washington ... and we don't know what Medicaid will look like and ... that's a concern."

Senate President Pro Tem Martin Looney said he is seeking assurances that hospitals won't come up short in the deal. "Obviously some municipalities are excited about the possibility of adding significant revenue if the hospitals are paying property taxes," said the Democrat from New Haven. "The hospitals are greatly concerned about ... Medicaid revenues, not knowing the level of federal funding in the future. And that's certainly a real concern."

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Looney said one of the ways to assuage those concerns would be to have the state step up if federal reimbursements are not forthcoming. "There has to be some protection if we do move forward to ensure the hospitals are made whole."

Rep. Themis Klarides, the Republican leader in the House, said the tax could be "the death knell" for small hospitals. "This is part of the continuing saga of messing with the hospitals," said Klarides, who serves on the Griffin Hospital board of directors. "I really don't know how much more they can take."